Inequality: What Can Be Done?

Anthony B. Atkinson

Inequality is now a prominent public concern, but distributional issues
are still shunned by most economists. In Inequality Atkinson places
them centre stage, looking at what economic inequality is and why it
matters, making some concrete proposals as to what can be done about
it, and responding to the most obvious criticisms of those proposals.
Though some of his discussion is general, the context and all the
concrete proposals are specific to the United Kingdom, which helps to
keep them grounded at the expense of making them less interesting to
those elsewhere.

What Can Be Done? is remarkably easy to read, with an approach that
avoids almost all technical details (one exception is a few pages on
revenue-maximising top tax rates). It is also pragmatic: Atkinson is not
after the optimal policy settings in each situation, let alone agreement
on what they might be, but is trying to find practical measures which
would move us in the right direction.

Atkinson begins with some background, looking at inequality of outcome
versus inequality of opportunity, ways of measuring income dispersion,
measuring consumption as an alternative to income, and so forth.
Then comes a historical overview, focused on the United Kingdom and
the United States but with some international comparisons, focusing on
falling inequality in the post-war decades and likely explanations for
that. And he touches on various aspects of the economics of inequality:
technology, labour markets, capital and monopoly power, and the connection
between individuals and macroeconomic aggregates.

Then come the proposals. Atkinson argues that the direction of
technological change is not entirely exogenous, but subject to policy
control to at least some extent:

"Proposal 1: The direction of technological change should be an
explicit concern of policy-makers, encouraging innovation in a
form that increases the employability of workers and emphasizes
the human dimension of service provision."

Similarly, competition policy can and should concern itself with
distributional issues. And there is a need for a countervailing power
against corporate dominance: the market "balance of power is weighted
against consumers and workers":

"Proposal 2: Public policy should aim at a proper balance of
power among stakeholders, and to this end should (a) introduce an
explicitly distributional dimension into competition policy; (b)
ensure a legal framework that allows trade unions to represent
workers on level terms; and (c) establish, where it does not
already exist, a Social and Economic Council involving the social
partners and other nongovernmental bodies."

These are fine in principle, but they (or at least 1 and 2a) seem among
the harder of Atkinson's proposals to actually implement in practice.
He passes over the problem of how the distributional consequences
of (say) breaking up Google or building a commercially viable fusion
power plant could be known in advance. It seems to me that, even for
progressive activists and politicians, concerns other than inequality
are likely to dominate in such decisions.

Work is a historical phenomenon and Atkinson argues that the modern
assumption or default of "employment" to full-time is increasingly
problematic: many people now have "portfolios" of income generating
activities, involving part-time employment, self-employment, temporary
jobs, and so forth. So "the labour-market goal should be stated, not in
terms of maximising employment, but in terms of minimising involuntary
unemployment, where this is measured in a way that reflects the new
features of the twenty-first century labour market".

Which leads to two proposals, the first for more direct action on
unemployment and guaranteed public employment and the second for a
statutory minimum wage augmented by a voluntary company "pay code"
constraining spreads between top and bottom.

"Proposal 3: The government should adopt an explicit target for
preventing and reducing unemployment and underpin this ambition
by offering guaranteed public employment at the minimum wage to
those who seek it."

"Proposal 4: There should be a national pay policy, consisting
of two elements: a statutory minimum wage set at a living wage,
and a code of practice for pay above the minimum, agreed as
part of a 'national conversation' involving the Social and
Economic Council."

Turning to capital, Atkinson looks at patterns of inheritance, housing
wealth, and rates of return; he emphasizes the difference between benefit
from and control of capital. His two proposals here seem fairly timid:

"Proposal 5: The government should offer via national savings
bonds a guaranteed positive real rate of interest on savings,
with a maximum holding per person."

"Proposal 6: There should be a capital endowment (minimum
inheritance) paid to all at adulthood."

The suggested sum involved with the second is only on the order of
£10,000, so is dwarfed by the handouts currently given to wealthy
investors. (A family able to put the full amount into a Child Investment
Savings Account each year would receive a larger tax subsidy over 18
years — and the resulting "endowment" would continue to be tax-free
for their child.)

Atkinson also proposes the setting up of a sovereign wealth fund:

"Proposal 7: A public Investment Authority should be created,
operating a sovereign wealth fund with the aim of building up
the net worth of the state by holding investments in companies
and property."

Which seems wrongheaded to me. Surely there are always going to be
infrastructure projects with better returns than passive investment in
property or shares, and foreign asset accumulation only really makes
sense if the country is running a current account surplus.

Turning to taxation, Atkinson makes the case for a higher top marginal
rate of income tax:

"Proposal 8: We should return to a more progressive rate structure
for the personal income tax, with marginal rates of tax increasing
by ranges of taxable income, up to a top rate of 65 per cent,
accompanied by a broadening of the tax base."

With that broadening involving changing the tax treatment of pension and
similar savings. This would be augmented by an earned income discount
for low income earners:

"Proposal 9: The government should introduce into the personal
income tax an Earned Income Discount, limited to the first band
of earnings."

He suggests that the estate tax be abolished, with recipients instead
paying a tax on inheritances above a certain lifetime amount:

"Proposal 10: Receipts of inheritance and gifts inter vivos should
be taxed under a progressive lifetime capital receipts tax."

And there should be reform of the regressive council tax system introduced
by Thatcher (which, as Atkinson points out, was in many ways worse than
the proposed poll tax):

"Proposal 11: There should be a proportional, or progressive,
property tax based on up-to-date property assessments."

Which would potentially be payable in the form of an equity stake.

As changes to social security, he suggests a universal but taxable
child benefit:

"Proposal 12: Child Benefit should be paid for all children at
a substantial rate and should be taxed as income."

And one of two proposals for broader social security:

"Proposal 13: A participation income should be introduced at the
national level, complementing existing social protection, with the
prospect of an EU-wide child basic income."

OR

"Proposal 14: There should be a renewal of social insurance,
raising the level of benefits and extending their coverage."

Strangely, at least to my mind, Atkinson comes down in favour of keeping
the separate system of National Insurance payments instead of rolling
it up into income tax, on the grounds that while it is not hypothecated
(ring-fenced) for social security payments people think it is and so
accept it.

"Proposal 15: Rich countries should raise their target for
Official Development Assistance to 1 per cent of Gross National
Income."

As well as these proposals, Atkinson fields a few "ideas to pursue":
including "a thoroughgoing review of the access of households to the
credit market for borrowing not secured on housing", an annual wealth
tax, changes to the taxation of pensions, a global tax regime, and a
minimum corporation tax.

Atkinson then addresses three of the more obvious criticisms of these
proposals. The first is that these measures may reduce inequality, but
only at the expense of "shrinking the size of the cake" by reducing output
or slowing growth. This is a possible problem, but "the a priori view
that there is an inevitable conflict between equity and efficiency is not
borne out by an examination of the underlying assumptions". The second
is that globalisation prevents action in this area by any one nation.
There are international constraints on individual countries, but they
do have choices and "are themselves partly responsible for the terms on
which they engage with the world economy". And the third is that the
measures proposed are unaffordable. This is addressed by attempting to
construct a revenue-neutral implementation of the proposals.

Inequality is practical and pragmatic, if not actually rather staid or
even dull. It's hard to see it mobilising the masses: no one is going
to go to the barricades for a 65% top marginal tax rate, let alone the
creation of "a Social and Economic Council involving the social partners".
Viewing this more positively, none of Atkinson's proposals would require
revolutionary change and in the United Kingdom his program is just
possibly within the scope of a left-moving Labour Party. Few will agree
with all Atkinson's proposals, but he has provided a useful reference
point for exploring the options available.